BRICS currency settlement: Promise and institutional challenge

Editor's Note: Ge Lin is a CGTN economic commentator. The article reflects the author's views, and not necessarily those of CGTN.

When BRICS countries — Brazil, Russia, India, China, and South Africa — moved to expand local currency settlement mechanisms, the decision reflected a deeper institutional turn: a growing divergence from the US-dollar-dominated financial architecture, which for decades has rested on assumptions of neutrality, liquidity, and universal access.

The 2022 freezing of Russia's dollar assets served as a global wake-up call, recasting dollar reserves from trusted stores of value into politically contingent instruments. In this climate, the very definition of monetary stability is shifting — from a matter of price and market depth to one of insulation from politicized financial risk.

BRICS Pay is emblematic of this institutional response. By enabling direct settlement in local currencies, it opens space for experimentation beyond the dollar framework. While the conceptual promise of BRICS local currency settlement is clear, its realization demands an equally clear-eyed understanding of the operational and institutional constraints involved.

This article focuses on three structural challenges — not as grounds for dismissal, but as necessary points of departure. Acknowledging these constraints is essential to clarifying the institutional architecture required for such a system to function. In any large-scale monetary experiment, success hinges not on rhetorical aspiration, but on the capacity to confront practical limitations — and to construct credible responses around them.

Designing exchange rate buffers for coordinated settlement

One of the primary objectives behind local currency settlement mechanisms is to reduce reliance on third-party reserve currencies in bilateral and multilateral trade. This shift, while strategically significant, also introduces exposure to direct currency fluctuation between trading partners — without the mediating stability traditionally provided by an anchor currency.

Among BRICS economies, exchange rate regimes are varied and largely uncoordinated, leading to non-negligible volatility across many currency pairings. In the absence of harmonized stabilization tools, participating central banks — particularly those of exporting countries — may find themselves absorbing currency risk. For instance, when China receives rubles in payment for exports, a subsequent depreciation of the ruble during the settlement lag can result in mark-to-market losses on central bank balance sheets.

At present, the necessary preconditions for instantaneous settlement — trusted cross-currency pricing and ample bilateral liquidity —         are not fully in place. Rather than attempting to replicate real-time clearing prematurely, a more feasible interim approach may involve scheduled and recurrent settlement windows. By instituting fixed clearing intervals, the system can reduce unpredictability for firms, limit exposure duration, and introduce a structured rhythm to transacting under fluctuating exchange rates.

In the event of significant exchange rate volatility, complementary instruments such as fiscal compensation mechanisms or stabilization funds may serve as effective buffers. Unlike monetary interventions, which can transmit unintended signals or create imbalances within the domestic economy, such fiscal tools offer a non-disruptive means of absorbing currency risk.

Over time, should exchange rate coordination and confidence within the BRICS framework deepen, the reliance on such buffers may gradually diminish. Yet under current conditions, ensuring transactional stability is likely to require some form of structured risk-sharing.

Unlocking liquidity through multilateral convertibility

A second constraint is liquidity usability. When a country receives payment in a partner's local currency, the value of that settlement depends on whether the currency can be reused — in third-party trade or investment. The issue becomes particularly acute in persistent trade imbalances, such as when one country regularly runs a large surplus with another and accumulates currency it cannot easily deploy.

Take the example of Brazil, which consistently runs a significant trade surplus with South Africa. In such transactions, Brazil receives large volumes of South African rand (ZAR) as payment. However, if a third country — for example, India — declines to accept ZAR in its own trade with Brazil, that currency becomes effectively non-transferable.

Without a multilateral clearing mechanism, the rand cannot be readily repurposed and instead accumulates in Brazilian accounts as an illiquid claim. It functions not as a usable asset in the broader BRICS ecosystem, but as a form of stranded credit — highlighting the systemic limitations of bilateral swap arrangements when used in isolation.

One solution is to establish a shared liquidity pool — a decentralized currency reserve managed by member central banks, where each contributes a portion of its own currency and receives proportional access to others'. This would enable indirect conversions — for instance, from one member's surplus currency to another's more usable tender — bypassing the need for perfect bilateral matching.

Additionally, the creation of a multilateral guarantee mechanism, perhaps in the form of a risk-weighted collateral facility, would allow for temporary imbalances to be absorbed. For example, a member holding excess local currency could temporarily exchange it for a more liquid unit from the pool —such as yuan or a digital accounting unit — while pledging the surplus currency as collateral. The value of what can be drawn would depend on the relative stability or acceptability of the pledged currency, incentivizing fiscal and monetary discipline.

A unified credit rating or convertibility index could also help participants assess risk more transparently and allocate liquidity more rationally. Together, these instruments would offer a flexible infrastructure for rebalancing, allowing the BRICS settlement system to function even amid trade asymmetries and liquidity fragmentation.

Operational access: From design to everyday use

The third structural challenge lies in operational connectivity. A cross-border local currency system — such as BRICS Pay or other arrangements under the broader BRICS settlement framework — must move beyond the level of central banks and reach the day-to-day operations of commercial banks and enterprises. Without this extension, even a well-designed mechanism risks falling short of its intended economic impact.

While adoption is accelerating, scalability still depends on whether firms and financial institutions across member countries can interface with the system smoothly, predictably, and with legal confidence. For enterprises, this means not only having access to interoperable platforms and settlement pathways but also domestic legal support that recognizes and enforces obligations settled in BRICS currencies.

In this sense, infrastructure must be understood as both financial and legal. Building true connectivity requires each country to internalize cross-border local currency settlement rules into domestic regulatory frameworks and compliance systems.

Rethinking monetary order through institutional imagination

The BRICS currency settlement framework does not seek to replace the dollar's role as a global price anchor or liquidity backstop. Instead, it aims to construct an institutional alternative that reflects the operational needs and sovereignty concerns of emerging economies. By decoupling settlement infrastructure from reserve concentration, it offers a different logic of financial coordination — one based on distributed mechanisms, shared protocols, and functional interoperability. In doing so, it reframes the very foundations of monetary sovereignty — not as a function of dominance, but as an outcome of institutional design.